Conservatives propose inheritance tax reforms

The Conservative Party has unveiled a range of options for reforming inheritance tax - including scrapping it altogether.

06:24 30 December 2004

The Conservative Party has unveiled a range of options for reforming inheritance tax - including scrapping it altogether - to reduce the number of people now subjected to it.

Rapid house price inflation means the tax, which was originally designed for the wealthiest, now affects an increasing number of people.

Recent estimates suggest that as many as 2.4 million homes are now worth more than the inheritance tax threshold of 263,000.

Shadow Chancellor Oliver Letwin said: "Inheritance tax is increasingly a tax on the homes of ordinary families. Around six million people are now living in homes which could be affected."

The Conservatives say scrapping the tax altogether would be the simplest option, but it would also be the most costly (2,900 million) and would not target those hard working families for whom the home is their main asset and who are most hit by the tax.

An alternative is to exempt people's principal residence from inheritance tax in the same way that they are exempted from capital gains tax. This would eliminate the problem of house price rises causing more and more people to be subjected to the tax, but would provide a further incentive to invest in housing over other assets and thus fuel house price inflation.

Other options include cutting the rate of tax from 40 per cent to anywhere down to ten per cent, at a cost to the Treasury of 80 million per one per cent reduction; raising the threshold to anywhere between 300,000 (costing the Treasury 500 million) and 1,000,000 (costing 2,500 million); or linking the inheritance tax threshold to increases in average house prices.

Mr Letwin added: "It is unfair to impose a high marginal rate of tax upon hard-working families who happen to live in parts of the country where property is expensive."

"I believe the tax system should support rather than penalise families building their financial security and independence."

The proposals follow plans for reforming capital gains tax announced on Wednesday, which also included abolishing it.

The party plans to publish further proposals for reforming council tax, the taxation of savings and pensions, the taxation of small businesses, and environmental taxes.